FedUpUSA

Archive for July 2nd, 2010

 

By Karl Denninger

Keep up the lying, legislators, about how it’s all “those other guys” fault…..

Yesterday gave me the opportunity to update this chart with an extrapolated forward number for this year through the first six months.

Yeah, tell me it’s all the Republicans’ fault.  Or all the Democrats’.

Nonsense.

Our government refuses to deal with the facts – there is no recovery in the private economy, there has been no recovery, private final demand collapsed in 2008 and has not come back one iota and the Feral Government is LYING – on both sides of the aisle.

You want a stock market crash and economic collapse Mr. Grayson?  Mr. Reid?  Ms. Pelosi?  Mr. McCain?  Mr. Hoyer?  Mr. Issa?  Mr/Ms (Pick a name)?

You’re going to get one and the longer you keep this crap up the worse it’s going to be.

Want to argue with me?  Go ahead and try – argue with the math.  I double-dog-dare you.  Tell me how we can keep doing what we’re doing, and for how long.  How long we can borrow and spend 10, 11, 12% of GDP on an annual basis before those who fund our national credit card say this:

Are you in Congress and the White House so damned arrogant as to think that this can’t or won’t happen?  What are you going to threaten people with?  6,000 nuclear weapons?  For what?  Refusing to fund an ever-spiraling higher Ponzi Scheme?  For how long will that game work?  Can such a threat be effective beyond the mathematical limits of capacity, even if the leaders of said nations want to continue doing so? 

No.

Here’s reality folks: We’ve written checks for 30 years with our political mouths we cannot cash with our producing fingers.  We’ve papered over this with fraud in virtually every nook and cranny of public and private life.  We have allowed producers to depart for lands where effective slavery exists for labor, refusing to enact parity tariffs to put a stop to it.  We have allowed blatant and outrageous theft of our producers’ intellectual property and conferred upon these nations “most-favored nation” trading status.  We have blown serial bubbles in the stock and housing markets and would love to blow another one in “carbon trading”, but all three were and are frauds without foundation in reality – or sustainability. 

Jeff Immelt, GE’s Chief Executive, came out today against the Chinese – and Obama:

He warned that the world’s largest manufacturing company was exploring better prospects elsewhere in resource-rich countries, which did not want to be “colonised” by Chinese investors. “I really worry about China,” Mr Immelt told an audience of top Italian executives in Rome, accusing the Chinese government of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful.”

Of course they don’t.  You slept with Satan and you woke up with a sore butt.  Who’s fault is this, exactly?  A government that’s communist, a workforce that operates under effective slave conditions, a population that has license to steal anything intellectual from anyone without recourse or the rule of law, indeed, a government that has stolen military secrets and warhead designs – when they couldn’t just buy them (as they did during Clinton’s term.)  Suddenly Mr. Immelt shows outrage and shock when the snake does what a snake does – and it was very visibly a snake before he got involved over there? 

Who’s responsible for intentionally sticking one’s hand on a lit BBQ?

There is no “lack of clarity” in the economy.  What has been done is transparent to anyone who cares to look.  The Federal Debt picture is published each and every day and it is clear, convincing, and irrefutable.  The same bluff was run in both Iceland and Greece, and got called twice by the market.  Europe has recognized this and has pledged to stop playing Ponzi (whether they’ll actually do it until cities burn at the hand of angry mobs is another matter, but at least they’re claiming intent.)  We, on the other hand, keep pressing for more and more Ponzi.

I don’t care if people want to talk about austerity – and implement it – or not.  I don’t care if people want cradle-to-grave medical care with the “best” we can offer.  I don’t care if people want to be able to have $100/month cell phones while unemployed, or 99 weeks of unemployment so they don’t have to save for their own tough times, or $40,000 annual tuition and fee costs at universities to learn about “woman’s studies” or “primary education.”

None of what I want, you want, or the government wants has a thing to do with the mathematics of the situation we have before us today and the instabilities we built into the economy over the last 30 years.

In 2000 we had to accept a 10% contraction in GDP, along with a reduction in debt levels in the system to 150-175% of GDP, to get back to some reasonable resemblance of parity.

In 2007 the contraction we had to accept was 20%.

Today, it’s approaching forty percent, and the commensurate reduction in debt in the system – in total - is about 60%.

This means the federal government must shrink in size by that same 60%.

As I said a couple of weeks ago, get the BBQ sauce and pick several sacred cows, because we must size the Federal Government to roughly 15% of a $10 trillion economy, or $1.5 trillion in total.  Here’s the pie chart you need to reduce by sixty percent:

Go ahead and tell me how you’re going to do it.  Or tell me, if you wish, that you’re NOT going to do it, and then extrapolate to how long our creditors will permit that situation to persist, because it is not under our control – it is under theirs.

We are in the beginning stages of a global asset market collapse.

When did the stock market take off?  At the same time the debt Ponzi took off.  The debt Ponzi is now collapsing.  What’s going to keep the stock market from losing all of the “gains” it put on during those years?  Yes, all the way back to early 1980s levels.

Go ahead – make the case that it won’t happen when the leverage capacity disappears – and it is disappearing.  The “establishment” folks know damn well this is in the cards, which is why they’re scrambling to lie, lie and lie some more lest you figure it out and hold them to account.  They’re well-aware that while most of the time the “elites” manage to do just fine there are historical exceptions when extreme imbalances are cranked too far and the arrogance of the elites continues beyond all reason.  Hold a seance and ask Marie Antionette’s ghost about the consequences of such actions and how quickly they can appear.

What you saw in 2008 was the opening act.  2009 and early 2010 was the intermission – the eye of the hurricane when everyone came outside and marveled at the pretty blue sky.

The back half of this Cat 5 storm is far worse as instead of an offshore wind this time we’ll get the onshore wind and a 30′ high storm surge. The wind is starting to pick up.

We either act right now or our choices will be made for us.

Now go watch the pretty Fireworks over the 4th of July weekend – and consider what it’s going to feel like when those start going off in your face in the coming weeks and months.

“Here it comes”

The Market-Ticker

 

By Karl Denninger

The “Big Report” is out…

Total nonfarm payroll employment declined by 125,000 in June, and the unemployment rate edged down to 9.5 percent, the U.S. Bureau of Labor Statistics reported today. The decline in payroll employment reflected a decrease (-225,000) in the number of temporary employees working on Census 2010. Private-sector payroll employment edged up by 83,000.

That was “better than expectations”?  Yawn.

More important was the decrease in average hourly earnings and the workweek decrease.  Both are pointing to a continuation of deflationary pressures.  It’s not serious – yet – but this isn’t what you want to see if the employment situation is supposed to be improving and the economy is supposed to be recovering.

Indeed, what this looks like from here is a rather serious softening in the employment market.

U-6 stands at 16.5%, which is down marginally (0.1%) from last month, while U-3 (the common “unemployment rate”) came in at 9.5%.

The best way to represent this is in my monthly tracking charts, which I’ve updated for you here.  First, the Employment Trends chart:

Meh.  That’s not improvement, it’s flat.  The rebound appears to be over, and it’s also an illusion, as this graph disregards the entrance into the labor market of new workers (about 150,000 a month.)  That’s reflected here:

Yeah.  We’ve managed a whole one percent improvement off the bottom: we were running around 63-64% from 2000 onward until 2007, we dove to 58%, and now have “recovered” to 59%.  The so-called “improvement” in private hiring the last few months haven’t moved the needle materially at all – indeed, the “real” improvement came from the first of the year until March. 

Since then? 

Nothing.

If this is all we’ve got then the so-called “double dip” is assured.  In point of fact, however, there was no material recovery from an employment perspective at all.

The so-called “Great Recession” (which will eventually be recognized as the Depression it is) continues.

The Market-Ticker

 

By Michael Pento

If policymakers do not understand the real cause of a problem, they will in all likelihood be unable to provide a genuine solution.

Messrs. Barack Obama, Benjamin Bernanke and Timothy Geithner do not understand the real cause of this debt crisis. They are politicians first and economists or students of the market second–if at all. Therefore, it is not wise to count on them to tell us when the Great Recession is over, or to provide a plan to prevent another one in the future.

The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels are the direct result of the central bank providing artificially low interest rates and of superfluous lending on the part of commercial banks.

The easy money provided by banks eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt.

Unfortunately, our politicians today are focused on fighting this natural healing process by promoting the accumulation of more debt.

During this latest economic contraction, the Federal Reserve took interest rates to near 0%, and the Obama administration is leveraging up the public sector to record levels in a bid to re-leverage the private sector. The government’s philosophy is tantamount to sticking a frostbitten man in the freezer so he won’t have to suffer the pain associated with the thawing of his extremities.

During the Great Depression, real gross domestic product plummeted 32%. The Great Recession, which we are still struggling through, began in December 2007, according to the National Bureau of Economic Research. In contrast to the 1930s, GDP during this recession shrank only 3.6% from the fourth quarter of 2007 through its low point in the second quarter of 2009. Between the fourth quarter of 2007 and the first quarter of this year (the most recent period for which data is available), GDP contracted a mere 1.1%.

The contraction in GDP during the Great Depression was the direct result of consumers paying down debt and selling off assets. Household debt as a percentage of GDP reached nearly 100% in 1929. To put that number in perspective, household debt did not go back above 50% of GDP until 1985. It was not until the first quarter of 2009 that household debt once again approached the Great Depression level of 100% of GDP.

Between the start of the Great Depression and the end of World War II, household debt fell from 100% to just above 20% of GDP. Getting there was a painful process, but such de-leveraging was the only real cure for an economy swimming in debt. Thanks to government efforts to carry on our debt-fueled consumption binge, during today’s Great Recession household debt has barely contract at all; it fell to 92.5% of GDP in the first quarter of this year.

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To make matters even worse, during this current crisis our government’s response has been to dramatically increase its own borrowing. At the start of the Great Depression, gross federal debt was 16% of GDP. It peaked just below 44% when the Depression ended. While the national debt did increase significantly during that period, it was still relatively benign when viewed from a historical perspective.
The U.S. entered the current Great Recession with gross national debt equal to 65% of GDP. It has since exploded to 90% of GDP! Comparing the relatively innocuous level of the 1930s with today’s pile of government debt clearly illustrates the perilous state of the economy.

National debt did rise dramatically during World War II, topping out at 120% of GDP in 1946. But consumer debt plunged concurrently. So while the nation was adding debt to fight and win a global war, households were taking the necessary steps to ensure their balance sheets were well prepared for the aftermath of the battle.

Today, gross national debt and household debt are both at or above 90% of GDP for the first time in our history.

Many observers–unfortunately including most of those in power–have concluded that the government must spend more while consumers rein in their debts. Their strategy is based on the belief that once the economy perks up they can unwind that debt.

There are two problems with this Keynesian theory. One is that government spending doesn’t increase GDP; it only chokes off private-sector growth. The other is that politicians never regard the present as a good time for the government to pay off its debts.

The result is that the country is left with a private sector reducing a massive overhang of debt. As households curb spending, GDP slows, and the ratio of debt to economic output grows even further.

Since we have yet to address the real cause of this recession, we are moving inexorably closer to causing The Greater Depression. If policymakers do not understand that the progenitor of a depression is debt, they will also be unable to provide a genuine solution.

Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.

Forbes

 

By Karl Denninger

 

By Karen Weise

Deep in an article today on the government’s bailout of AIG, The New York Times cites sources saying that the Treasury Department’s “point man” on AIG, Don Jester, was a former Goldman Sachs employee who owned stock in the bank even as he was making decisions [1] on the bailout that ultimately channeled billions of taxpayer dollars to Goldman.

Owning stock in a company an official oversees typically is verboten, but because Jester was working as an outside contractor rather than an official employee, he was exempt from conflict-of interest rules [2].

American International Group building in New York City (Spencer Platt/Getty Images)

Goldman Sachs stood to benefit from the AIG bailout because Goldman had roughly $20 billion in insurance-like credit-default swaps with AIG — essentially bets by the investment bank that the housing market would go south. But if AIG collapsed, Goldman wouldn’t be able to collect on the bets. When the government instead bailed out AIG, taxpayers paid out the swaps at full face value, and Goldman Sachs got $12.9 billion [3] — more than any other of AIG’s customers.

Jester was Goldman’s deputy CFO when he left the firm in 2005. And here’s what the Times says [1] about his investments in Goldman:

Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury’s response to the A.I.G. crisis.

We contacted Jester this morning to comment on the story and confirm the stock ownership; we’ll post an update when we get a response. His spokesperson, Michelle Davis, told the Times that Jester followed what the paper paraphrases as an “ethics plan to avoid conflict with all of his stock holdings.” (According to a federal database search, Jester received $30,000 [4] for six months consulting at the Treasury Department.)

Earlier this year, a Times op-ed online dubbed Jester one of the “mystery men” [5] of the financial crisis and noted that Jester was at the center of the Treasury Department’s response to AIG’s impending collapse. During the chaotic two months in the fall of 2008, Timothy Geithner, then the head of the Federal Reserve Bank of New York, spoke on the phone with Jester 103 times — more than other person aside from then-Treasury Secretary Henry Pauslon. Jester relocated to AIG’s offices for a period of time, the paper reported.

The government’s decision to have AIG pay out Goldman and others bets at full value has been controversial. The Times said while several of the Federal Reserve Bank of New York’s outside advisors recommended it force banks to take losses on their bets with AIG, Jester advocated for full repayment:

According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. Nothing in the documents indicates that Mr. Jester advocated forcing Goldman and the other banks to accept a discount on the deals.

As an example of the advice against paying full value for the deals, the Times cited a presentation from an advisor [6] to the New York Fed, which outlined five reasons banks should agree to concessions. The Federal Reserve Bank of New York defended its decisions to the Times:

“This was not about the banks,” said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G. “This was about stabilizing the system by preventing the disorderly collapse of A.I.G. and the potentially devastating consequences of that event for the U.S. and global economies.”

ProPublica